Welcome to the first part of our Bitcoin Learner Series. In this series, we’ll cover many topics right from Bitcoin beginner basics, through to more advanced concepts related to mining, wallets, trading and development. Don’t worry though – we’re going to use plain English all the way and avoid technical terms as much as possible…even your gran would understand (maybe).
Before we get into the details of Bitcoin, we first need to talk about the concept of money.
What is Money?
In its most basic form, money is a store of value. I give you money, you return something of value such as an object or a service. Money as we know it has existed since approximately 7th century BC, in the form of coins that could be exchanged for goods and services.However there have been many other things used to represent money going back as far as 9000BC, things including Barley, wheat, spades, but of course…gold. All of these things represented value and could be exchanged for other goods or services.
Not everything represents a store of value. In order for us to attach value to something, we need people to both trust and agree that it is valuable. People still agree that gold is valuable, however, it soon became too much effort to carry around gold bullion of bales of wheat and simply wasn’t convenient. To overcome this, paper money was invented to replace gold. Banks (controlled by the government) would allow people to bring their gold and replace it with a note, guaranteeing the return of your gold; should you want it. These notes or bills were also far more convenient as they allowed you to spend smaller denominations. For example, if you exchanged $100 worth of gold, the bank could give you five $10 bills and 50 $1 bills. So these notes effectively acted as a promise from the bank to return that amount in gold when needed. You could buy something for $53, hand over your bills and the recipient could take them to the bank and exchange them for gold whenever they wished.
Breaking The Bond
As you can imagine; over a period of time; fewer and fewer people actually returned their bills to the bank to exchange for gold as it was still heavy and inconvenient to carry. It was also becoming impractical for banks to store large quantities of gold as they became prime targets for frequent (and usually violent) robbery. So instead, the bond between gold and paper money was broken and instead, everyone agreed to simply carry money as a store of value.
Sounds strange? Don’t forget how happy you are to carry a credit card to represent your money – which is really just a piece of plastic with a number on it and costs about 30 cents to make.
But why are people happy to buy and sell things for bits of paper that aren’t backed by something material such as gold?
People are willing to trust the government that paper money and coins still hold value. Money that is backed by a government is called ‘fiat’, ‘fiat currency’ or; more commonly, legal tender.
Legal tender has to be accepted in return for goods and services by decree of the government. Interesting, the word ‘fiat’ originates from Latin, meaning ‘by decree’.
Today the majority of citizens are willing to agree that fiat currency is valuable because it has a legal promise of that value underwritten by the government or some other central authority. This might sound great, but it actually causes a few problems of its own.
In the US we have the Federal Exchange, in the UK there is The Bank of England; and your country will have some similar central authority responsible for printing money. Now in theory, that central authority can print as much (or as little) money as they like. If the economy needs more money, they simply print more and enter it into circulation. However this creates a challenge. By creating more money, each note in your pocket actually drops in value. Sound familiar? This is what we call ‘inflation’. That thing that used to cost around $8 a few years ago, now costs $10. It’s not that the price has gone up, but rather that the value of your money has gone down. Ouch!
The next problem was that banks hoarding huge piles of cash have the same problem as those that used to carry lots of gold. It soon becomes inconvenient and risky to store and move. In today’s economy, it would be unrealistic to ship billions of dollar bills to the middle-east in return for oil. With advances in technology, it has become possible for banks to instead track who owns money, and how much, digitally rather than them having to hold reserves of cash for their owners. In fact, the quantity of paper money and coins in circulation decreases every year and is only a tiny fraction of the amount of ‘money’ stored digitally in files on the bank’s computers. Wait what? Digital files? Can’t you copy a digital file pretty easily?
The Double Spend Problem
If money is stored in files, why can’t someone just copy that file over and over until they become very rich? This is what’s known as the Double Spend Problem. It’s nothing new, the same challenge exists with paper money where it can be counterfeited by criminals who print money themselves. Luckly, there are mechanisms in place to make this quite difficult to do, although it does still happen but less today than ever before. Back to digital. By keeping a central register of who owns how much money, banks are able to keep track of each customer’s account digitally; assuming we can trust the bank’s computer of course.
That sure seems like a lot of trust in someone else. Can we be sure to trust everyone with access to our money? Well, not always. If the central bank in your country chooses to print loads of new money, such as most did during the economic crisis of 2008, then the money we trusted them with became less valuable; often through no fault of our own – yet we all share the risk of it happening. In some countries, this happened to such an extent, where the value of their money decreased massively. In fact, between 2008 and 2009; the value of the Zimbabwean dollar (ZWD) decreased so massively as to cause the currency to collapse. At the peak of the crisis, prices of basic items like food actually DOUBLED every 24 hours, causing food shortages and soaring unemployment. In some towns, people actually carried money in wheelbarrows, just to buy small items…until the actual wheelbarrow became worth more than the money it could carry!
The final problem with fiat money is control. You have to trust your bank 100% to a) look after your money and b) make sure you can access it. This isn’t always the case. History has shown us that when bank customers decide to withdraw their money en-masse, that the bank can actually freeze withdrawals. In other cases, banks can freeze the account of an individual, for example if the court believes that someone’s money has been illegally obtained.
Given all these challenges, someone had the brilliant idea of a decentralized currency that could overcome many of these challenges.
The Birth of Bitcoin
In 2008, someone by the name of Satoshi Nakamoto wrote a whitepaper which they published online, outlining the concept of a decentralized digital currency which they referred to as Bitcoin. The outline described it as:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
In the same way that a bank stores digital money on its ledger, Bitcoin is a ledger that is distributed, or decentralized, meaning that many people own a copy of the ledger that says who owns what. The key difference here is that the ledger owned by the bank is totally private and nobody else knows how much money another customer has. In a decentralized ledger, the exact opposite is true – everyone knows how much another user has, this making it transparent. However the owner of the money is anonymous so you never actually know who is in possession of that bitcoin because unlike a bank ledger that has a name (or account owner), the ledger for bitcoin uses random (but unique) sequences of numbers and letters. This decentralized ledger is called the Blockchain.
Above is an example of a Bitcoin transaction (someone sending bitcoin to someone else) on the blockchain. See? All gobbledygook (it won’t be for much longer!). In this example, we can see that someone has sent 1.083 Bitcoin (or BTC) to someone else but the sender and receiver are essentially anonymous. The ‘Hash’ is basically the reference number of the transaction (the code that we ask you for when you use our bitcoin transaction accelerator. This is a relatively small transaction worth about $23,000 at the time of writing but we regularly see transactions being accelerated with hundreds of thousands of USD!
Anyway, the main thing here apart from being anonymous, is that Bitcoin is decentralized, with copies of the anonymous ledger stored on many thousands of computers. That means that if you wanted to hack the blockchain, you’d need to actually hack many thousands computers that hold a copy of the ledger.
What Makes Bitcoin so Great?
Unlike traditional currency, Bitcoin is 100% digital, meaning that you can’t actually touch it as no physical coins are actually minted. The ledger simply contains row after row of transaction details and anonymous balances. When you have a wallet containing Bitcoin, all that really means is that you have access to a Bitcoin address stored in the ledger along with the funds with it. If you have access, you can ‘spend’ it too, meaning you can transfer it from one wallet to another.
Part of what makes this so special is that there is finally an alternative to the digital money we’ve had in our bank accounts for many years. Better yet, no government owns or controls it. In the same way that you used to go to the library to read a book, today you can read it online on your Kindle or other ebook reader. Well, in the same way, Bitcoin is the next evolution of money. And like an ebook reader vs a paperback book, Bitcoin has several special advantages over fiat money.
You get complete control. Only you can access your Bitcoin and nobody can take it away from you (without tricking you into doing so). No bank or authority can take it away from you and it also costs less to spend than traditional international bank transfers. Probably the best advantage is that anyone with a mobile phone with internet access can use it. Which is great for the 2+ billion people worldwide who don’t have access to a traditional bank account for whatever reason.
There are many places that accept Bitcoin or allow you to turn your Bitcoin back in to fiat currency (like how people used to take gold to the bank).
As great as this may sound, we are still a LONG way from global acceptance of Bitcoin and other digital currencies. In future articles, we’ll cover exactly how Bitcoin works and how you can get into using it (or evening ‘mining’ your own Bitcoin!).
Congratulations on finishing this article. You now know more about Bitcoin than almost everyone else on the planet!
- Bitcoin is a store of value
- Bitcoin isn’t a physical item like gold and is purely digital
- Bitcoin is unregulated, meaning that it isn’t controlled by a government, bank or other central authority
Next up: Part 2 – What is a Bitcoin wallet?
Remember: If you already know all this and just came for our main service, please click to use our btc accelerator.